Those may turn out to be minor compared with the looming financialcrisis the Tempe-based airline faces as it moves on after thecollapse of merger talks with United Airlines last week. An unprecedented spike in oil prices, combined with a weak economy,threatens to send several carriers to the brink of bankruptcy orliquidation by the end of this year or early next year, analystssay. advertisement US Airways is seen as among the most vulnerable of the majorairlines, given its relatively small size, route network andlimited assets to sell to raise cash. One analyst last week listed US Airways among three carriers with"very large" losses forecast for this year and next. Last month, another rated US Airways as having the highestbankruptcy risk among the major airlines. Chief Executive Officer Doug Parker saw a merger with United asboth airlines' best chance of weathering the storm, given theflight cutbacks, cost cutting and new sales opportunities that comeby combining two airlines. US Airways and America West saw early financial success and asoaring stock price after their 2005 merger. With the United deal out as an option and no other merger talks onthe horizon, US Airways now must move quickly to prepare for theunforeseen reality of exorbitant fuel prices. "They need to batten down the hatches and look to do some of thesame things everyone else is doing," said Jim Corridore,airline-equity analyst for ratings agency Standard & Poor's. American, for example, recently announced that it plans to cut seatcapacity by 11 to 12% and ground planes after the busy summertravel season, a move likely to impact thousands of employees. Itis also the first airline to start charging for the first checkedbag, effective June 15. Hardly a day goes by without an airline's announcing a cost-cuttingor money-raising move to offset the staggering impact of fuel. In addition to flight cutbacks, airlines are deferring aircraftorders, increasing fees on everything from pets in the cabin tounaccompanied minors and adding new fees such as American'sfirst-checked-bag charge. US Airways executives, who declined to be interviewed, have alreadytrimmed the airline's flights in the second half of the year butnothing to the extent of American. They have started selling prime window and aisle seats and todaystopped serving pretzels and snack mixes on U.S. flights. The airline has repeatedly told employees in recent months that thefuel crisis dictates a new way of doing business. Parker reiterated that again in a memo to employees Fridayconfirming the end of merger talks. "We are working a number of initiatives, and you'll hear more aboutthem in the weeks and months ahead," he said. On the revenue side, US Airways is said to be seriously consideringcharging for soft drinks ($3) and pillows and Airline Blankets United CEO Glenn Tilton sounded similar, although more ominous,themes in his message to employees Friday announcing that a mergerwas out for United. He said the U.S. airline industry is facing a $20 billion increasein its fuel bill, with United's portion $3.5 billion. "It's clear that the status quo is not sustainable," Tilton said."The magnitude of the challenge the industry faces demandsunprecedented change." He said the airline had already taken significant steps, includinggrounding 30 aircraft, and reducing capacity by 9% in the fall. "That said, we must do more, and that work is underway," he said. Corridore said the industry needs to shrink the number of availableseats by about 25% if oil prices stay where they are. Ray Neidl, airline analyst with Calyon Securities, puts the figureat 20% of domestic seat capacity and notes that that's theequivalent of all the seats US Airways, Continental and Frontierhave in the United States, combined. Parker doesn't paint as bleak a financial picture for US Airways asanalysts do. He has repeatedly said the airline is sittingrelatively pretty, given its $2.4 billion in unrestricted cash atthe end of the first quarter and refinancings that pushed its majordebt repayments into the future. "We have more cash relative to size than most of our peers and havefewer obligations coming due in the next few years," he toldemployees in the memo Friday. Still, others are concerned. Credit ratings agency Fitch Ratings last week downgraded theairline's debt ratings, among other airlines'. The firm said USAirways is more sensitive to swings in the price of jet fuelbecause its trips are shorter than many of its competitors,estimating that each 10 cent change in the per-gallon pricerepresents another $120 million in annual operating costs. Fitch said the airline has less flexibility in its pilot unioncontracts to cut capacity this year. Others say US Airways has fewer options for raising money.According to JP Morgan airline analyst Jamie Baker, US Airways'biggest assets are Embraer regional jets (estimated at $65 millionto $70 million) and airport landing and takeoff slots in theWashington, D.C., area (less than $75 million).
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